Should Student Loans be Banned If Students Are Stupid Enough to Take Advantage of Them?


Sunday's New York Times carried the latest story in a never-ending series on how student-loan debt is killing an entire generation's chances to live happy, meaningful lives. As someone who financed my own higher education through the Ph.D. level without parental help (they were willing, just unable, alas), I have a lot of sympathy for kids struggling to pay for a B.A. or more.

But the sob story the Times leads with in "A Generation Hobbled by the Soaring Cost of College" would make Mother Teresa ask some tough questions not of "the system" but of the students who take advantage of cheap money via student loans. Meet Kelsey Griffith, who has wracked up an enormous $120,000 in student loan debt to attend Ohio Northern, a little-known private school in a state known to have some of the very best public universities in the country:

Ms. Griffith, 23, wouldn't seem a perfect financial fit for a college that costs nearly $50,000 a year. Her father, a paramedic, and mother, a preschool teacher, have modest incomes, and she has four sisters. But when she visited Ohio Northern, she was won over by faculty and admissions staff members who urge students to pursue their dreams rather than obsess on the sticker price.

"As an 18-year-old, it sounded like a good fit to me, and the school really sold it," said Ms. Griffith, a marketing major. "I knew a private school would cost a lot of money. But when I graduate, I'm going to owe like $900 a month. No one told me that."

No, Griffith was plainly not a good fit for Ohio Northern. Indeed, it's hard to imagine who would be a good fit for the place if it actually costs $50,000 a year. But it's simply unbelievable that "no one told [her] that" her monthly payments would be $900. If the loan officers she worked with or her school's financial aid advisers didn't, then I'm pretty sure her mother did. After all, as the story points out, Mom co-signed the notes:

"If anything ever happened, God forbid, that is my debt also," said Ms. Griffith's mother, Marlene Griffith.

(A word to the wise-in-training: Get into the best college you can and then attend the one that you can best afford. Research consistently shows that it matters little where you end up actually attending, which should give hope to more people than it gives offense.)

The Times story runs through the litany of fears and anxieties about "soaring costs" of college. There's no question that college expenses are rising faster than inflation. There seems to be equally little question that one of the major causes is precisely the massive amount of free and reduced-price money flowing into higher education via expanded federal and state-level grants and expansions of governmentally run lending programs. That's precisely how you create an asset bubble—you pump a lot of extra money into an area of activity that wouldn't otherwise command that level of attention.

After breathless stories about student-loan debt reaching the magical $1 trillion level and kids actually having to work to make their monthly payments, the Times does note that "the average debt in 2011 was $23,300." That's not a back-breaking amount of money—given a range of relevant interest rates on subsidized student loans, it should work out to less than $300 a month over a standard 10-year repayment schedule. Which seems like a pretty good deal for a degree that is likely to raise lifetime earnings by somewhere between a quarter-million and a million dollars. The Times says that "ninety-four percent of students who earn a bachelor's degree borrow to pay for higher education," a statistic that is far higher than other estimates I've seen, which put the figure closer to 40 percent or 56 percent.

After trying to induce tears through stories such as Kelsey Griffith's, the Times comes up short in exploring any good options to address the issue of rising college costs and incidents of ridiculous levels of individual debt taken on by students at nonprofit and "for-profit" colleges (as if all institutions aren't equally money-making ventures). That's likely because the solution that is most obvious—reducing the ease with which students can take out taxpayer-subsidized loans at below-market rates—is unpalatable to the writers and editors at the nation's paper of record (indeed, the paper editorialized that Congress should have permanently lowered Stafford loan rates to 3.4 percent when it had the chance). But that's precisely how you keep bubbles from happening, isn't it? You stop using various subsidies to direct investment into areas where it wouldn't go otherwise.

If that were to happen—and schools such as Ohio Northern were run out of business as a result—we would doubtless be reading tearjerker Times stories about the death of massively overpriced small colleges across this sweet land of liberty.

Watch 3 Reasons We Shouldn't Bail Out Student Loan Borrowers from Reason.tv:

Read more here.